New Kinds of e-Commerce

As more people live in the virtual world ' sometimes also called the digital or synthetic world ' in one of the many so-called massively multiplayer online role-playing games (MMPORGs) available online, the potential for monetary abuse and malfeasance grows.

While private gaming companies built the original virtual worlds for their subscriber base, and were controlled by designers and end-user licensing agreements (EULAs), new MMPORGs provide players with more freedoms ' including the ability to create, seclude or launder wealth, a very different kind of e-commerce from that to which e-commerce pioneers are accustomed.

The likelihood of this new technology being co-opted for unscrupulous purposes is great, as historically, the same thing has happened after other technological advances, such as 'property' created for a game can be misappropriated, even leading to violence (see, 'Virtual Worlds And Digital Rights' in the Sept. 2005 edition of our sibling newsletter, Internet Law & Strategy).

From Virtual Currency To Hard Cash

The majority of MMPORGs are designed to allow gamers to build their digital persona, or 'avatar,' in the virtual society by various acts, including earning virtual currency. This happens through offering virtual goods or services to others in the digital world, much like in the real world. For years, gamers have sold digital monies, goods or property for real-world compensation on auction sites such as eBay. Likewise, virtual entrepreneurs are maintaining successful businesses in various MMPORGs. Consider Jon Jacobs, who spent $100,000, which comprised arguably his entire net worth at the time, to purchase a digital space station in the game Entropia Universe. Since his purchase, he's generated about $12,000 a month in income selling residential and commercial real estate on the station, and with taxes on activities of players there. By imposing taxes, it seems that Jacobs has taken the position of a quasi-governmental agency, which in itself raises issues beyond the scope of this article. But, the grand opening of the space station nightclub 'Neverdie,' and profits obtained from mining/hunting rights and property sales on the station, are expected to put Jacobs' net worth at $1.5 million, making him the first virtual-world millionaire. Likewise, the avatar named Anshe Chung, whose real-world counterpart keeps her name secret, is known as the virtual Donald Trump. In the game Second Life, she charges players Linden dollars (worth about 250 to the real dollar) to rent or buy virtual homesteads. The value of her synthetic real-estate holdings is estimated at around $250,000 in hard cash. These are just two examples of people leaving the real world, and taking permanent financial and social residence in the virtual world.

Some may question the value of virtual money if it's stuck in the digital world, but as technology advances and changes, it's no longer stuck there. When MMPORGs were developed, players were able to convert virtual dollars to hard currency only through online auction sites. Then, players were able to convert digital earnings into real cash directly through virtual-currency arbitrage-trading Web sites such as www.GamingOpenMarket.com. With credit cards, virtual currency can be converted to hard currency at the prevailing rate, giving players a better idea of the value of their virtual assets. On May 2, the virtual world took a huge step toward becoming part of the real world when Entropia Universe's makers introduced a plan to provide its 250,000 gamers with a real-world ATM card to instantly withdraw hard cash from their virtual-world assets. The stated conversion rate will initially be one real dollar for every 10 Project Entropia Dollars (P.E.D.s). With this announcement, it will be no more difficult to access virtual monies as real-world monies, and will likely go a long way toward Entropia Universe's stated goal of creating a 'full second reality.'

Virtual Financial Crimes

Interpol defines virtual money as 'money value as represented by a claim on the issuer which is stored on an electronic device and accepted as a means of payment by persons other than the issuer. Virtual money is an encrypted code representing money, in the same way that paper money is only paper bearing certain characteristics such as graphics and serial numbers.'

There are two distinct types of virtual money:

1. Identified virtual money. This con-tains information revealing the identity of the person who originally withdrew the money from the bank. The money can be traced through the economy, by the bank or law-enforcement personnel, like credit cards.
2. Anonymous virtual money. Once withdrawn from an account, it can be spent or given away without leaving a transaction trail. Using blind signatures rather than non-blind signatures creates anonymous e-money.

Virtual money is money in the real sense because it can be converted into other forms of currency. A large portion of online transactions involve debit and credit cards. An advantage and purpose of using virtual money is that it allows individuals normally excluded from e-commerce, by their economic status or other reasons, to participate. The cash-like nature of virtual money means that positive credit history or an established banking relationship isn't required. Given the definitions and descriptions above, it seems clear that virtual monies in MMPORGs will fall in the virtual-money category. And, if it can be accessed instantly, safely, and with relative ease, it's likely people will feel that cash being held in a virtual world isn't really different from cash in a brick-and-mortar, or electronic, bank. With direct deposit, electronic transfers and Internet banking, more people aren't setting foot in banks, nor requesting to see hard currency. The more the boundaries are crossed between the real financial markets and the virtual worlds, the more the games become open rather than closed, and subject to being co-opted and monitored by real-world law-enforcement (but as discussed below, that doesn't seem to pose a real threat at the moment).

Also, because virtual-world monies can be passed from person to person in any amount without reporting requirements or an e-trail, it seems to fit the definition of anonymous virtual money. That being said, there's potential for unscrupulous or illegal abuses of the virtual-monetary systems that exist in the various MMPORGs. Some of these risks are:

• Unauthorized creation, transfer or redemption of virtual money;
• Using a virtual market to mask the holder or value of virtual funds; and
• Criminal attacks on virtual-money systems, leading to loss of virtual-money value or loss of function of the virtual-money system.

Virtual Asset Creation and Seclusion

Estimates place gamer transactions last year in Entropia Universe alone at $165 million, which correlates to about $650 dollars per player. If you combine the number of transactions that occurred in Entropia Universe and other MMPORGs, the result tops $1 billion last year alone. While that may not seem much when you average it among millions of gamers, it covers the spectrum from those who don't really participate in the virtual economy, all the way to those who drive the digital economy like the two entrepreneurs discussed earlier. And this doesn't account for the underlying value of the intellectual property that exists in these virtual worlds that hasn't been offered for sale or otherwise monetized. The actual value of the assets in the virtual world, then, is potentially astronomical. The makers and users of these games are under no obligation to track and report to the government transactions or assets amassed or held by players. And because most assets are connected to an avatar, a synthetic-individual representation, the real-world owner of the assets is given more protection from potential discovery.

Besides the loss of potential tax revenue to a government from people creating assets or generating income in the virtual world that's not being reported, the potential for illegally secluding assets in the virtual world also exists. Since the inception of Entropia Universe and certain MMPORGs, it's been possible for players to add monies to their online accounts through credit cards and electronic-bank transfers. It's possible, then, not only to create assets the government doesn't know about, but also to move real-world assets into the virtual world where they would continue to exist, and are hidden from additional governmental view. This possibility of shielding assets or income may alone be the impetus for certain people to hide behind the persona of an avatar. Through these ownership levels, players could create and hold significant financial assets not reported or subjected to scrutiny by authorities. Combine this with the ability to access these funds at a moment's notice in the real world through an ATM card, and you have a recipe for illegal activity.

Virtual Money Cyberlaundering

Traditional money-laundering in-volves significant physical effort. A person must conceal the existence and source of the funds, and then disguise the monies to make them appear legitimately earned. To accomplish this means the launderer must physically move hard currency while not attracting unwanted attention from government agencies. Initially, this was very low-tech and might involve such acts as transporting monies out of the country to regions with less-strict banking regulations, or making multiple deposits into various accounts under the $10,000 reporting threshold. But in 1986, the Money Laundering Control Act was enacted to further criminalize these laundering techniques. As technology advanced, however, launderers began seeking quicker and easier methods to 'clean' their monies. Electronic funds transfers or wire transfers became the favored method, because they provide a swift and nearly risk-free conduit to move money between countries. But these transactions involve 'identified virtual money,' as discussed above, so it's possible to some extent to track the funds' source and recipient.

The great demand for efficient consumer transactions has led to electronic cash, which launderers have embraced for its potentially anonymous nature. Electronic cash, or digital money, is virtual-world replacement for hard currency and, like hard currency, once removed from an account, it can be transferred or given to any party without leaving a trail ' electronic or otherwise. With such freedom of unregulated and unreported access and transfer as that being offered first by Entropia Universe's accounts, the Money Laundering Control Act will be difficult to fully enforce. Also, because Entropia Universe's accounts are likely non-FDIC insured and presumably lack federal regulation, there should be no mandatory compliance with the filing regulations in the Money Laundering Control Act of 1986.

Virtual-world gamers can buy, sell, give, and trade monies and goods, so it's possible for one virtual-world avatar to arrange a meeting with another, who may or may not be in another country, and drop off goods or monies worth significant sums of hard currency for the other party to take up. Think about it: The digital transfer of perhaps a significant sum has taken place that is not being reported to any regulatory or investigative agency. The person controlling the second avatar could immediately access the monies through the Entropia Universe ATM card. All of this has been done quickly and easily, resulting in one party having 'virtually clean' money (pun intended) without leaving a trail for investigators. If Entropia Universe accounts, or those provided by other gaming companies that will likely follow suit, are able to continue operating outside the reach of current federal regulations, then laundering funds through an MMPORG may become the easiest method ever. To combat this, the makers of Entropia Universe claim to have vetted their ATM idea with the Swedish government, where the company is located, and that protective measures have been taken to avoid any such monetary malfeasance. But because the company hasn't released the exact nature or extent of these steps, and hasn't dealt with the IRS or other U.S. agency on the matter, whether or not the measures will pass muster under U.S. laws, or could otherwise be circumvented, remains open for debate.

Virtual Monetary System Attacks

Recently in South Korea, two people manipulated a virtual-world server to create virtual currency worth more than $1 million. It raises the question of whether creating virtual dollars, which can be converted to real-world money, is merely a computer-hacking crime, or tantamount to counterfeiting or forgery. While this act may also fall under creating virtual wealth, it demonstrates potential for attacks on the virtual-world monetary systems. As with the real world, creating counterfeit virtual money can deflate the virtual-world economy. This becomes a problem because the value of every other individual's assets in the virtual world is lessened to some extent and can cause inflation to run rampant in the system. Also, if more monies are wrongfully inserted into a system allowing for ATM cash withdrawals than the gaming company can cover, this could cause 'a run on the bank,' so to speak, which could then cause serious financial damage to the company itself, with the foreseeable consequences of other gamers' assets to follow. It's not a difficult scenario to imagine a technically adroit and criminally inclined individual breaking into a virtual-world server, and either creating from scratch, or just wrongfully transferring property or monies from other parties to an avatar under his or her control. As has been shown historically, money-launders or organized-crime members are nothing if not creative in using technology or innovation to advance their schemes.

Current Governmental Policing

From a discussion with a representative of the U.S. Department of Justice Computer Crime and Intellectual Property Section, it seems that the possibility of an MMPORG being co-opted for criminal purposes hasn't become a subject of investigation. INTERPOL, however, is obviously wary. A discussion on its Web site of virtual money includes the following: 'Online games now have their own foreign exchange which lets players buy and sell different virtual currencies, just as in the real world. Criminals will undoubtedly take advantage of this.' (See, www.interpol.int/public/TechnologyCrime/CrimePrev/VirtualMoney.asp.) Given the privacy protection that the virtual world can provide an avatar, a governmental investigative agency wouldn't have access to the identity or transactions of any individual without the cooperation of the company that developed and maintains a game. And some of these companies are based in places not amenable to fostering such cross-border investigative cooperation. Although costly to develop, it's possible to imagine that a well-funded criminal organization might create an MMPORG for the sole purpose of masking or advancing its criminal objectives ' or both.

All these hurdles may make investigation and enforcement of various current laws very difficult, if not impossible, unless more, and better, monitoring and reporting requirements are attached to the virtual world. Given the state of things, we truly have entered a 'brave new world.'

As more people live in the virtual world ' sometimes also called the digital or synthetic world ' in one of the many so-called massively multiplayer online role-playing games (MMPORGs) available online, the potential for monetary abuse and malfeasance grows.

While private gaming companies built the original virtual worlds for their subscriber base, and were controlled by designers and end-user licensing agreements (EULAs), new MMPORGs provide players with more freedoms ' including the ability to create, seclude or launder wealth, a very different kind of e-commerce from that to which e-commerce pioneers are accustomed.

The likelihood of this new technology being co-opted for unscrupulous purposes is great, as historically, the same thing has happened after other technological advances, such as 'property' created for a game can be misappropriated, even leading to violence (see, 'Virtual Worlds And Digital Rights' in the Sept. 2005 edition of our sibling newsletter, Internet Law & Strategy).

From Virtual Currency To Hard Cash

The majority of MMPORGs are designed to allow gamers to build their digital persona, or 'avatar,' in the virtual society by various acts, including earning virtual currency. This happens through offering virtual goods or services to others in the digital world, much like in the real world. For years, gamers have sold digital monies, goods or property for real-world compensation on auction sites such as eBay. Likewise, virtual entrepreneurs are maintaining successful businesses in various MMPORGs. Consider Jon Jacobs, who spent $100,000, which comprised arguably his entire net worth at the time, to purchase a digital space station in the game Entropia Universe. Since his purchase, he's generated about $12,000 a month in income selling residential and commercial real estate on the station, and with taxes on activities of players there. By imposing taxes, it seems that Jacobs has taken the position of a quasi-governmental agency, which in itself raises issues beyond the scope of this article. But, the grand opening of the space station nightclub 'Neverdie,' and profits obtained from mining/hunting rights and property sales on the station, are expected to put Jacobs' net worth at $1.5 million, making him the first virtual-world millionaire. Likewise, the avatar named Anshe Chung, whose real-world counterpart keeps her name secret, is known as the virtual Donald Trump. In the game Second Life, she charges players Linden dollars (worth about 250 to the real dollar) to rent or buy virtual homesteads. The value of her synthetic real-estate holdings is estimated at around $250,000 in hard cash. These are just two examples of people leaving the real world, and taking permanent financial and social residence in the virtual world.

Some may question the value of virtual money if it's stuck in the digital world, but as technology advances and changes, it's no longer stuck there. When MMPORGs were developed, players were able to convert virtual dollars to hard currency only through online auction sites. Then, players were able to convert digital earnings into real cash directly through virtual-currency arbitrage-trading Web sites such as www.GamingOpenMarket.com. With credit cards, virtual currency can be converted to hard currency at the prevailing rate, giving players a better idea of the value of their virtual assets. On May 2, the virtual world took a huge step toward becoming part of the real world when Entropia Universe's makers introduced a plan to provide its 250,000 gamers with a real-world ATM card to instantly withdraw hard cash from their virtual-world assets. The stated conversion rate will initially be one real dollar for every 10 Project Entropia Dollars (P.E.D.s). With this announcement, it will be no more difficult to access virtual monies as real-world monies, and will likely go a long way toward Entropia Universe's stated goal of creating a 'full second reality.'

Virtual Financial Crimes

Interpol defines virtual money as 'money value as represented by a claim on the issuer which is stored on an electronic device and accepted as a means of payment by persons other than the issuer. Virtual money is an encrypted code representing money, in the same way that paper money is only paper bearing certain characteristics such as graphics and serial numbers.'

There are two distinct types of virtual money:

1. Identified virtual money. This con-tains information revealing the identity of the person who originally withdrew the money from the bank. The money can be traced through the economy, by the bank or law-enforcement personnel, like credit cards.
2. Anonymous virtual money. Once withdrawn from an account, it can be spent or given away without leaving a transaction trail. Using blind signatures rather than non-blind signatures creates anonymous e-money.

Virtual money is money in the real sense because it can be converted into other forms of currency. A large portion of online transactions involve debit and credit cards. An advantage and purpose of using virtual money is that it allows individuals normally excluded from e-commerce, by their economic status or other reasons, to participate. The cash-like nature of virtual money means that positive credit history or an established banking relationship isn't required. Given the definitions and descriptions above, it seems clear that virtual monies in MMPORGs will fall in the virtual-money category. And, if it can be accessed instantly, safely, and with relative ease, it's likely people will feel that cash being held in a virtual world isn't really different from cash in a brick-and-mortar, or electronic, bank. With direct deposit, electronic transfers and Internet banking, more people aren't setting foot in banks, nor requesting to see hard currency. The more the boundaries are crossed between the real financial markets and the virtual worlds, the more the games become open rather than closed, and subject to being co-opted and monitored by real-world law-enforcement (but as discussed below, that doesn't seem to pose a real threat at the moment).

Also, because virtual-world monies can be passed from person to person in any amount without reporting requirements or an e-trail, it seems to fit the definition of anonymous virtual money. That being said, there's potential for unscrupulous or illegal abuses of the virtual-monetary systems that exist in the various MMPORGs. Some of these risks are:

• Unauthorized creation, transfer or redemption of virtual money;
• Using a virtual market to mask the holder or value of virtual funds; and
• Criminal attacks on virtual-money systems, leading to loss of virtual-money value or loss of function of the virtual-money system.

Virtual Asset Creation and Seclusion

Estimates place gamer transactions last year in Entropia Universe alone at $165 million, which correlates to about $650 dollars per player. If you combine the number of transactions that occurred in Entropia Universe and other MMPORGs, the result tops $1 billion last year alone. While that may not seem much when you average it among millions of gamers, it covers the spectrum from those who don't really participate in the virtual economy, all the way to those who drive the digital economy like the two entrepreneurs discussed earlier. And this doesn't account for the underlying value of the intellectual property that exists in these virtual worlds that hasn't been offered for sale or otherwise monetized. The actual value of the assets in the virtual world, then, is potentially astronomical. The makers and users of these games are under no obligation to track and report to the government transactions or assets amassed or held by players. And because most assets are connected to an avatar, a synthetic-individual representation, the real-world owner of the assets is given more protection from potential discovery.

Besides the loss of potential tax revenue to a government from people creating assets or generating income in the virtual world that's not being reported, the potential for illegally secluding assets in the virtual world also exists. Since the inception of Entropia Universe and certain MMPORGs, it's been possible for players to add monies to their online accounts through credit cards and electronic-bank transfers. It's possible, then, not only to create assets the government doesn't know about, but also to move real-world assets into the virtual world where they would continue to exist, and are hidden from additional governmental view. This possibility of shielding assets or income may alone be the impetus for certain people to hide behind the persona of an avatar. Through these ownership levels, players could create and hold significant financial assets not reported or subjected to scrutiny by authorities. Combine this with the ability to access these funds at a moment's notice in the real world through an ATM card, and you have a recipe for illegal activity.

Virtual Money Cyberlaundering

Traditional money-laundering in-volves significant physical effort. A person must conceal the existence and source of the funds, and then disguise the monies to make them appear legitimately earned. To accomplish this means the launderer must physically move hard currency while not attracting unwanted attention from government agencies. Initially, this was very low-tech and might involve such acts as transporting monies out of the country to regions with less-strict banking regulations, or making multiple deposits into various accounts under the $10,000 reporting threshold. But in 1986, the Money Laundering Control Act was enacted to further criminalize these laundering techniques. As technology advanced, however, launderers began seeking quicker and easier methods to 'clean' their monies. Electronic funds transfers or wire transfers became the favored method, because they provide a swift and nearly risk-free conduit to move money between countries. But these transactions involve 'identified virtual money,' as discussed above, so it's possible to some extent to track the funds' source and recipient.

The great demand for efficient consumer transactions has led to electronic cash, which launderers have embraced for its potentially anonymous nature. Electronic cash, or digital money, is virtual-world replacement for hard currency and, like hard currency, once removed from an account, it can be transferred or given to any party without leaving a trail ' electronic or otherwise. With such freedom of unregulated and unreported access and transfer as that being offered first by Entropia Universe's accounts, the Money Laundering Control Act will be difficult to fully enforce. Also, because Entropia Universe's accounts are likely non-FDIC insured and presumably lack federal regulation, there should be no mandatory compliance with the filing regulations in the Money Laundering Control Act of 1986.

Virtual-world gamers can buy, sell, give, and trade monies and goods, so it's possible for one virtual-world avatar to arrange a meeting with another, who may or may not be in another country, and drop off goods or monies worth significant sums of hard currency for the other party to take up. Think about it: The digital transfer of perhaps a significant sum has taken place that is not being reported to any regulatory or investigative agency. The person controlling the second avatar could immediately access the monies through the Entropia Universe ATM card. All of this has been done quickly and easily, resulting in one party having 'virtually clean' money (pun intended) without leaving a trail for investigators. If Entropia Universe accounts, or those provided by other gaming companies that will likely follow suit, are able to continue operating outside the reach of current federal regulations, then laundering funds through an MMPORG may become the easiest method ever. To combat this, the makers of Entropia Universe claim to have vetted their ATM idea with the Swedish government, where the company is located, and that protective measures have been taken to avoid any such monetary malfeasance. But because the company hasn't released the exact nature or extent of these steps, and hasn't dealt with the IRS or other U.S. agency on the matter, whether or not the measures will pass muster under U.S. laws, or could otherwise be circumvented, remains open for debate.

Virtual Monetary System Attacks

Recently in South Korea, two people manipulated a virtual-world server to create virtual currency worth more than $1 million. It raises the question of whether creating virtual dollars, which can be converted to real-world money, is merely a computer-hacking crime, or tantamount to counterfeiting or forgery. While this act may also fall under creating virtual wealth, it demonstrates potential for attacks on the virtual-world monetary systems. As with the real world, creating counterfeit virtual money can deflate the virtual-world economy. This becomes a problem because the value of every other individual's assets in the virtual world is lessened to some extent and can cause inflation to run rampant in the system. Also, if more monies are wrongfully inserted into a system allowing for ATM cash withdrawals than the gaming company can cover, this could cause 'a run on the bank,' so to speak, which could then cause serious financial damage to the company itself, with the foreseeable consequences of other gamers' assets to follow. It's not a difficult scenario to imagine a technically adroit and criminally inclined individual breaking into a virtual-world server, and either creating from scratch, or just wrongfully transferring property or monies from other parties to an avatar under his or her control. As has been shown historically, money-launders or organized-crime members are nothing if not creative in using technology or innovation to advance their schemes.

Current Governmental Policing

From a discussion with a representative of the U.S. Department of Justice Computer Crime and Intellectual Property Section, it seems that the possibility of an MMPORG being co-opted for criminal purposes hasn't become a subject of investigation. INTERPOL, however, is obviously wary. A discussion on its Web site of virtual money includes the following: 'Online games now have their own foreign exchange which lets players buy and sell different virtual currencies, just as in the real world. Criminals will undoubtedly take advantage of this.' (See, www.interpol.int/public/TechnologyCrime/CrimePrev/VirtualMoney.asp.) Given the privacy protection that the virtual world can provide an avatar, a governmental investigative agency wouldn't have access to the identity or transactions of any individual without the cooperation of the company that developed and maintains a game. And some of these companies are based in places not amenable to fostering such cross-border investigative cooperation. Although costly to develop, it's possible to imagine that a well-funded criminal organization might create an MMPORG for the sole purpose of masking or advancing its criminal objectives ' or both.

All these hurdles may make investigation and enforcement of various current laws very difficult, if not impossible, unless more, and better, monitoring and reporting requirements are attached to the virtual world. Given the state of things, we truly have entered a 'brave new world.'